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AESTIMATIO, THE IEB INTERNATIONAL JOURNAL OF FINANCE, 2015. 10: 32-65© 2015 AESTIMATIO, THE IEB INTERNATIONAL JOURNAL OF FINANCE

Mergers and acquisitions: types, principles, historical information and empirical evidencefrom the Greek banking sector Rompotis, Gerasimos G.

� RECEIVED : 22 JANUARY 2014

� ACCEPTED : 10 JUNE 2014

AbstractThis paper describes the types and main principles of mergers and acquisitions, a

strategic policy adopted by many firms worldwide in their efforts to expand their

business, enter new markets, sectors and countries as well as to mitigate the

competition they face from rivals. In addition to the description of the various types of

mergers and acquisitions, the motivations behind such actions are broken down along

with the obstacles and counterincentives that can lead to the failure of such deals and

the significant issue of financing a merger or an acquisition. A brief analysis of the

recent trends in international mergers and acquisitions is subsequently provided. The

paper goes on to focus on the recent wave of acquisitions in the Greek banking sector

by highlighting the case of Alpha Bank’s takeover of Emporiki Bank. The analysis

performed provides some evidence of a positive financial effect for Alpha Bank’s

shareholders as a result of the announcement of that takeover.

Keywords: Mergers, Acquisitions, Banking sector, Greece.

JEL classification: G34.

Rompotis, G.G. Department of Economics of the National and Kapodistrian University of Athens, Greece. 25 Ypsilantou Str, 12131,Peristeri, Athens, Greece, +302105776510. E-mail: geras3238@yahoo.gr

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ARCH A

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LE DOI:10.5605/IEB.10.2

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AESTIMATIO, THE IEB INTERNATIONAL JOURNAL OF FINANCE, 2015. 10: 32-65© 2015 AESTIMATIO, THE IEB INTERNATIONAL JOURNAL OF FINANCE

Fusiones y adquisiciones: tipos, principios, información histórica y evidencia empírica del sector bancario griego Rompotis, Gerasimos G.

ResumenEste artículo describe los tipos y principios fundamentales de las fusiones y adquisi-

ciones, política estratégica adoptada por muchas compañías de todo el mundo en

su esfuerzo por expandir su negocio, entrar en nuevos mercados, sectores y países,

así como por mitigar la competencia de otros rivales. Además de la descripción de

los diferentes tipos de fusiones y adquisiciones, se desglosan las motivaciones que

subyacen a tales acciones, junto con los obstáculos y contra-incentivos que pudieran

hacer fracasar tales acuerdos, así como se estudia la importante cuestión de su fi-

nanciación. A continuación, se lleva a cabo un breve análisis de las tendencias ac-

tuales en el curso de las fusiones y adquisiciones. Posteriormente, el artículo se centra

en la ola de recientes adquisiciones en el sector bancario griego, destacando el caso

de la absorción del Emporiki Bank por el Alpha Bank. El análisis realizado propor-

ciona cierta evidencia del efecto positivo en el valor de la cartera de los de los accio-

nistas del Alpha Bank provocado por el anuncio de tal absorción.

Palabras clave: Fusiones, adquisiciones, sector bancario, Grecia.

n 1. Introduction

The globalization of the economy, the liberation and consequent spectacular growth

in the international trade of goods and services as well as the free movement of capital

has led to fierce competition in every single sector of the global business field. As a

result, companies must continuously strive to increase their size and market shares,

upgrade their knowledge, improve their effectiveness and performance, and optimize

the usage of all the available resources so as to ensure their survival and success.

In pursuing growth, companies have three main alternative possibilities to choose from.

The first concerns internal growth where the company builds on its own capabilities in-

vesting capital in developing new products, markets, skills and knowledge. The second

choice relates to the so-called “strategic alliances” such as joint ventures, franchises

and network co-operation. The third possibility, and in fact a common course of action,

regards the mergers and acquisitions of entities that may operate in similar business

sectors (horizontal integration) or different sectors (vertical integration).

The phrase “mergers and acquisitions” (M&A) relates to the corporate strategy, cor-

porate finance and business management involved with the buying, selling, dividing

and combining of different or similar entities with a view to helping an enterprise

grow rapidly and boost its position in its sector or location of origin. Mergers and

acquisitions also allow companies to enter a new field or new location or country

without the need to create a subsidiary entity or use a joint venture.

The distinction between a merger and an acquisition has become increasingly blurred

in various aspects. Although the terms merger and acquisition are often used synony-

mously, they mean slightly different things. When one company takes over a part or the

whole of another and clearly establishes itself as the new owner of the entity, the trans-

action is regarded as an acquisition. From a legal point of view, in the case of the total

acquisition of a company, the result of such a transaction is that the buyer absorbs the

business and the target company ceases to exist. In addition, in the case of listed com-

panies, only the stocks of the buyer company continue to be traded on the stock ex-

change. In the case of partial acquisitions, the buyer may or may not take over the

management and control of the target company depending on the portion of the entity

acquired and the portion remaining in the hands of the previous shareholders. It should

be added that, usually, the companies involved in an acquisition are of different mag-

nitudes, meaning that a large company purchases a smaller one.

On the other hand, a merger happens when two firms reach an agreement to continue

their business action as a single new company instead of remaining separately owned

and operating individually. This kind of action is more precisely referred to as a “mergerMer

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of equals”. The entities involved in a merger of this kind are often of about the same

size. In addition, the stocks of both companies are redeemed and new stock is issued

to replace the old one. As an additional distinction between mergers and acquisitions,

we should note that a purchase deal is also called a merger when the top management

of both the firms agree that joining together will best serve their common interests and

contribute to the increase of profitability and effectiveness of both the companies. How-

ever, when the deal is unfriendly, namely when the target company does not want to be

purchased, the deal is always regarded as an acquisition.

With respect to the abovementioned distinction of mergers and acquisitions, it should

be borne in mind that in practice there are few actual mergers of equals. What typically

happens is that as part of the terms of the deal, when one company takes over another,

the acquired entity is allowed to claim that the transaction is a merger of equals, even

though it is an acquisition in all technical and legal respects. This policy is adopted mainly

because the purchase of a firm often creates negative connotations for the acquired firm

among investors and anyone else with an interest in the company. Therefore, the de-

scription of an acquisition as a merger of equals is part of the deal makers’ and top man-

agers’ endeavor to make the takeover more palatable, to alleviate any resistance from

the employees of the target company and to obviate any other opposition to the deal.

There are various types of mergers and acquisitions which are described in detail in this

paper. Furthermore, the various incentives and motivations behind mergers and acqui-

sitions are broken down. The counterincentives and the failures of mergers and acqui-

sitions are also examined. In addition, the financing options in mergers and acquisitions

are assessed. All of these issues are included in section 2 of this paper. Section 3 dis-

cusses the recent trends in mergers and acquisitions by providing a brief analysis of the

major deals of the last two decades along with a relevant examination of the banking

sector in the United States and Europe. The last issue examined in section 4 concerns

the recent wave of acquisitions in the Greek banking sector. In this respect, all the recent

transactions among the Greek banks are described but the focus is on the takeover of

Emporiki Bank by Alpha Bank and the implications for the shareholders of Alpha Bank.

The conclusions of the study are summarized in section 5.

n 2. Background elements

2.1. Types of mergers and acquisitions

There are several types of mergers and acquisitions and several applicable dimensions

or categorizations. As mentioned previously, one kind of distinction concerns the

business sectors of the companies involved. More specifically, when the two

companies operate in the same cluster, the transaction is considered to be horizontal,

namely it concerns the efforts of a company (in the case of an acquisition) or two

companies (in the case of a merger of equals) to boost their market share within their

location or to expand their activities in new locations. When the acquiring entity and

the target firm do not belong to the same sector, the merger or the acquisition is

considered to be vertical and reflects the acquiring entity’s strategy of entering new

business sectors. A merger of this type is also called a “conglomerate merger”. A

vertical merger can be further broken down into ‘forwards’ or ‘backwards’ vertical

mergers. The former allows commercial profits to be maintained within the company

and the latter helps the company to undertake preliminary productive activities, for

which it used to pay third parties.

In the case of horizontal mergers and acquisitions, the variety of the produced goods

and services does not change significantly. In addition, there might be negative

implications in a social and macroeconomic sense, such as the decline in healthy

competition among the firms, which hinders the rationalization of prices charged

and the improvement in the quality of the goods and services offered, as well as the

development of monopolistic or oligopolistic markets, which usually has a detrimental

effect on social welfare.

Another source of categorization concerns the “privatization” of the target firm. In

particular, mergers and acquisitions are divided into “private” and “public” ones

depending on whether the merging or acquired company is listed on a public stock

exchange market or not. When the deal concerns a public company, its shares are

usually, but not always, delisted as the acquisition of the majority or all of an entity’s

shares by one buyer is in opposition to the regulatory requirements for listed companies.

These requirements stipulate the diversification of shares’ owners and prohibit the

ownership of listed firms being concentrated in the hands of one or a few shareholders.

An additional dimension or categorization refers to whether an acquisition is friendly

or hostile. The identification of an acquisition as a friendly or a hostile depends on

whether the target entity consents to the deal or not. In the case of the target entity

not agreeing to the purchase bid, the transaction is regarded as a hostile takeover,

via which the buyer “forcibly” takes absolute control of the acquiring company.

In the case of hostile takeovers, the target company may react via capital increase

with priority given to the old shareholders (poison pill), counteroffers for the

acquisitions of the bidder (packman defense), the repurchase of its own shares by

the company itself, the creation of a negative climate for the company via asset and

liability restructuring or via a merger with a third entity which is considered friendly

by the Board of Directors (BOD) of the target firm.

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Whether an acquisition is considered friendly or not, significantly depends on how the

proposed deal is communicated to and perceived by the target company’s board of di-

rectors, employees and shareholders. In the case of a friendly transaction, the two com-

panies negotiate the terms of the desired deal. On the contrary, in the case of a hostile

takeover, the management of the target is unwilling to be acquired while the target’s

BOD has no prior knowledge of the offer. However, a hostile acquisition can ultimately

become friendly, if the buyer ensures that the transaction is eventually sanctioned by the

BOD of the acquired entity after improving in the offer’s terms or relevant negotiations.

As mentioned above, an acquisition usually refers to a purchase of a smaller entity

by a larger one. However, there are cases where a smaller company acquires

management control of a larger firm or a firm that has been in business for longer

than the acquiring company, and where the post-acquisition entity retains the name

of the target company. This kind of transactions is called a reverse takeover. Similarly,

there is the reverse merger, which takes place when a privately held company that has

great potential and that is eager to raise funds on the stock market, purchases a

publicly listed firm, usually one with no business and limited assets. This transaction

enables the private company to become publicly listed in a relevantly short time in

order to finance its developmental strategy and plans.

A further type of acquisition concerns the buyout of the target company’s top

management. In these cases, large companies of great economic magnitudes in terms

of production, sales and profitability acquire the management of other smaller entities

in order to exploit their particular knowledge and experience in the field in which the

smaller firm operates. In other words, the big company seeks to take advantage of

the “team capital” of the smaller firm, which can be more specialized, communicative,

flexible and effective in comparison to the big company in several areas.

Another type of merger is the so-called “Joint Venture”. This scheme concerns the

cooperation of two or more different companies for the accomplishment of a

common objective. Joint ventures often sail in uncharted waters and as such they are

considered high-risk business plans with a high degree of uncertainty about their final

outcome. This type of cooperation is common in the cases of large scale constructions

of a public nature such as motorways, bridges and other infrastructure.

An additional form is the so-called “Leveraged Buy Out”, which concerns the

development and growth of a company via the assumption of debt in order to finance

the acquisition of other entities, usually larger than itself. This is an aggressive

developmental policy, which entails particularly high levels of risk for the firm relating

to the high degree of leverage and the resulting extreme negative consequences should

the plans financed by massive banking loans fail.

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A last point to make is that when referring to the concept of mergers and acquisitions,

the terms “demerger”, “spin-off” and “spin-out” are also applicable. These terms are

sometimes used to indicate a situation where one company splits into two generating

a second company separately listed on a stock exchange.

In addition to the above categorization of mergers and acquisitions, it should be

pointed out that there are also a variety of structures used in securing control over

the assets of a company, which have different tax and regulatory implications. In this

respect, there is the case of the bidder purchasing the shares of the target firm and

taking hold of the acquired company’s control. Ownership of control in turn conveys

effective control over the assets of the company. However, this form of transaction

also carries with it all of the liabilities accrued by that business in the past and all of

the risks that company faces in its commercial environment. Another example

concerns the purchase of the target company’s assets by the buyer. In such a case,

the cash paid to the target firm by the vendee is paid back to the shareholders of the

target as dividend or through liquidation. This type of transaction leaves the target

company as an “empty shell”, if the buyer buys out the entire assets. However, the

buyer may choose not to buy all the assets and liabilities of the entity.

2.2. Motivations behind mergers and acquisitions

When assessing the factors which drive mergers and acquisitions among companies,

a significant segment of the literature highlights the explanatory capital market forces.

Nelson (1959) claims the expansion of mergers in the United States was closely

related to the state of the capital market. The wave of acquisitions driven by stock

market misvaluations have also been highlighted by other studies such as those of

Shleifer and Vishny (2003) and Gang Bi and Gregory (2010).

Along with stock market forces, the literature on mergers and acquisitions offers a

wide range of alternatives on why corporations engage in such corporate deals. The

dominant rationale behind the activity of the companies involved in mergers and

acquisitions is that acquiring firms can significantly contribute to the improvement

of financial performance. The motives and benefits relating to the improvement of

financial performance can be separated into three categories on the basis of the time

needed in order for the expected benefits from the merger or the acquisition to accrue.

The three categories considered include the short-run implications, the medium-run

effects and the long-run impacts of the deal.

The immediate benefits expected from a merger or acquisition include various financial

and economic factors. One of these factors relates to the earnings per share, the EPS

ratio, of a listed company which effects the acquisition of another company. In

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particular, such business initiatives are expected to amplify the EPS ratio of the entity

and create surplus value for its shareholders. In the same respect, another known

financial ratio of the company that is expected to get improved by an acquisition is the

price per earnings, the P/E ratio, which is an indicator of the “premium” an investor is

willing to pay for a unit of earnings made by the company. In terms of improving the

P/E ratio of the acquiring company, the main objective of an acquisition or a merger is

to smooth the earnings results of the firm, which over the short-run or the longer-run

smoothes the company’s price on the board of the stock exchange, giving conservative

investors more confidence to invest in the company.

Another short-term benefit relates to the various synergies than can be gained in

several areas such as liquidity, production costs and sales. Ravenscraft and Scherer

(1989) note that operating synergies can arise through the achievement of economies

of scale and scope, the avoidance of performing duplicate activities, the pursuance

of vertical integration, and the transfer of managerial skills and knowledge by the

acquiring company to the target company. It should be also noted that, according

to Comment and Jarrel (1995) and Andrade et al. (2001), operating synergies tend

to arise mainly when the merging companies operate in the same or related sectors.

Typical examples of operating synergies include the case where a firm facing liquidity

shortages and difficulties in financing its operation through the banking system seeks

to merge with a healthier company which will have a better liquidity and credibility.

This actually aims to improve cash flow stability and lower the risk of bankruptcy for

companies facing financial hardships (Lewellen, 1971; and Higgins and Schall, 1975)

as well as access to cheaper capital and an internal capital market (Bhide, 1990).

Another example of synergies concerns the interchange of managerial specialization

and knowledge between the two companies. Within this context, some companies

carry out acquisitions as an alternative to the normal process of hiring experienced

employees and management executives. This is particularly common when the target

is a small private company or is in the startup phase. In this case, the acquiring

company simply hires the staff of the target private firm, thereby acquiring its talent

and knowhow. The target private company simply dissolves and few legal issues are

involved. The increased bulk-buying discounts that can be achieved by a large firm

are also an example of short-term synergy benefits. Finally, synergies may include

acquirement of technology as well as other tangible and intangible assets.

Despite the benefits expected from synergies, it should be notes that the achievement

of synergies is a matter of fact and should be approached cautiously. As noted by

Basmah and Rahatullah (2014) companies should approach vertical mergers

cautiously as it is often difficult to gain synergy through such a merger transaction.

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Companies need to diversify their activity in order to improve their performance,

increase the wealth of their shareholders and the value of their shares is another

factor which motivates organizations to engage in mergers and acquisitions. In this

respect, Servaes (1996) offers a comprehensive study of the value of diversification

during the conglomerate merger wave.

Another frequently cited motivation concerns the usage of takeovers (and especially

the hostile ones) as a force of discipline to correct managerial failures or non-

alignment of incentives between managers and owners. Several studies, such as

those of Hasbrouck (1985), Palepu (1986) and Mitchell and Lehn (1990) provide

evidence that, prior to the acquisition, the performance of target firms in a hostile

takeover is inferior to the performance of firms in a friendly takeover.

Cross-selling is an additional benefit that can accrue in a relatively short time frame

after the merger or the acquisition. For example, a bank which decides to buy a

stock brokerage firm obtains access to a wide range of new customers to whom it

can sell its products. On the other hand, the broker can sell its products and

services to the customers of the bank. Overall, a significant increase in the whole

sales’ volume and profitability is expected as a result of the deal between the two

firms. This may be the case for a manufacturer who can acquire and sell

complementary products. The benefits of cross-selling may be both short-term

and longer-term.

Overcoming of entrance barriers to a market is another motivation behind a merger

or an acquisition that can be beneficial in a relatively short time frame. Such barriers

regard the investments needed for a company to enter a new market, such as the

development of fixed assets, the launch of substitute products and their marketing,

the power of the firms that are already established in the sector, as well as possible

obstacles raised by government policy and regulatory requirements. In these cases,

it is much easier for a company wishing to enter the market to do so via the acqui-

sition of an entity that already operates in the market of interest.

Finally, there are considerable tax benefits expected from acquiring a company or

merging with a company (Scholes and Wolfson, 1990). More specifically, a

profitable company may buy a loss-making entity to use the target’s accumulated

taxable loss in its favor thus reducing its own tax liability. In this respect, it should

be noted that in the United States and many other countries, rules are in place to

limit the ability of profitable companies to acquire loss-making companies, limiting

the possible tax motive of an acquisition. Other tax motivations may concern

changes in the tax scale of the new scheme and the possible increase in the tax-free

reserves built by the new entity.

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When it comes to the medium-term benefits from a merger or an acquisition, the most

common relate to economies of scale and economies of scope that can be achieved by

the new business arrangement. The former refers to the fact that the combined firm

can often reduce its fixed costs by removing duplicate departments or operations,

lowering the operating costs of the company relative to the same revenue stream, thus

increasing profit margins. In addition, cost savings can also be attained as a result of

the negotiating power of the new entity with its suppliers thus achieving better prices

or higher discounts for the goods and services it receives. The latter relates to the

efficiencies primarily associated with demand-side changes, such as increasing or

decreasing the scope of marketing and distribution of different types of products.

Along with the boost in liquidity of the acquiring company at the short-run level, a

general improvement in its financial position may be achieved in the medium-run. In

this respect, the consolidated financial statements reporting increased assets,

magnitudes and equity mitigate the risk run by the company’s shareholders and

creditors thus improving its ability to raise funds from the banking system with better

terms and lower interest rates. The improvement of the company’s financial position

also relates to the decrease in the company’s total indebtedness, which is possible

given that an acquisition is expected to improve productivity, increase profitability

and enhance cash flow.

Finally, on the question of long-run benefits from mergers and acquisitions for a com-

pany activating in this field, one of the main benefits concerns the strengthening of

the firm’s competitive position. More specifically, a big company usually outperforms

its competitors. In addition, if the mergers and acquisitions activity results in the de-

crease in the number of participants in a particular market, the remaining players can

reach an agreement that relaxes the competition among them, resulting in savings of

resources consumed under conditions of intense competition while also maintaining

their prices and profitability at a sufficiently high level.

Going further, synergies already achieved in the short- or the medium-term can be

much more significant in the long-run. Additional synergies relate to the accumulated

increase in the new entity’s size and the identification of new business opportunities

that can be exploited due to the size of the firm. These opportunities and the entire

spectrum of possibilities in increasing productivity and profitability of the entity

derived from the merger or acquisition cannot usually be fully assessed at the

beginning of such an endeavor.

Another long-run result of a merger or an acquisition is that the creation of large

multifarious corporations itself generates new chances for further development via

new mergers and acquisitions. In this way, the companies are better equipped to face

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the challenges of globalization and international competition while they also become

more capable of tackling unwanted offers and hostile takeovers.

Moreover, the reduction in the costs and time needed for the development of a new

product is another motivation behind an acquisition, which has long-run

implications. In particular, an innovation or the diversification of production is known

to be time consuming, namely much time must pass before the innovation becomes

productive and generate profit for the company. In addition, innovations usually carry

a high risk of failure. Therefore, in many cases the management of a company decides

to pay a high price to acquire an entity that already operates in the sector of interest

rather than bearing the costs and risks of developing of a new product from scratch.

We conclude this section on the motivations behind mergers and acquisitions by

noting that these deals usually create surplus value for the shareholders of the

dominant company. They may also create value for the shareholders of the acquired

or merging entity under certain conditions. However, the consequences for the

economy and society as a whole are multifold and sometimes controversial.

2.3. Counterincentives and failures of mergers and acquisitions

Along with the wide range of motivations and benefits relating to mergers and

acquisitions, there are also several counterincentives contributing to the failure of such

transactions that need to be broken down. One key source of failure concerns the

personal interests of the target company’s executives and employees. These interests

regard the compensations, bonuses and other benefits offered to them by the target

company and their fear that the new ownership might reduce or revoke them. In

addition, there are fears among the acquired entity’s personnel that there might be

abolition of several positions driving them to the unemployment. Practically, this is the

case for the majority of mergers and acquisitions. However, the number of people losing

their occupation varies depending on the proliferation of the departments and services

as well as the size of staff between the acquiring and redeemed firms.

Another significant issue, which quite often causes negative effects on the chances a

merger or an acquisition stands of being successful, concerns the cultural differences

between the companies involved. The collision between the business cultures of the

entities halters the realization of all or some of the expected benefits from the deal.

The competition between the managing boards of the two companies is also another

example of cultural conflicts along with the pecuniary implications of management

conflict. The cultural differences may also result in delays in the prompt consolidation

of the entities, delays that might lead to the withdrawal of the plans about the merger

or acquisition.

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In addition to the above factors, the frequency and quality of communication of the

expected benefits to the target company’s staff also is crucial for the accomplishment

of the goals set via a merger or an acquisition. It has been observed that quite often

the communication between the management of the acquiring company and the

people of the acquired entity is poor. This lack in communication along with the

dismissals of personnel that frequently take place results in the deal not meeting the

expectations. With respect to dismissals, the probability of failure is even greater if

the withdrawals are not voluntary.

Another source of failure concerns the lack of a suitable strategic plan framed under ra-

tional expectations after carefully assessing all the available resources as well as the pos-

sible outcomes. In this respect, the planning of a strategic merger or acquisition based

on non-rational and over-optimist expectations about the synergies, economies of scale

and the profits to be made via such a deal provides the market with a wrong view of the

possibilities of the scheme that is to be created and ultimately leads to the failure of the

entire venture. Additionally to the lack of a comprehensive strategic plan, the hastiness

occasionally observed in completing a deal without performing a thorough and qualita-

tive financial, economic and legal audit of the target firm also contributes to the failure

of the endeavor. The lack of a full recognition of the changes that will occur in the struc-

tures of the target firm is another element being within the concept of the above factors

that also exerts a negative impact on the chances of success of a merger or an acquisition.

Going further, the price paid for an acquiring entity might be too high to help the

deal succeed. This issue relates to the techniques used for the evaluation of the target

company. With respect to the evaluation techniques, there are several possibilities.

One of these possibilities regards the method of Net Present Value, according to which

the value of the target firm reflects its current value in the market. Other possibilities

in evaluating the company that is to be acquired relate to the Book Value and the

Current Value of the company in the stock exchange market.

Finally, the general market and economic conditions along with the legal and institu-

tional framework are of high importance for the success of an acquisition or a merger.

In this respect, unfavorable laws or governmental interventions along with possible neg-

ative or even hostile macroeconomic and entrepreneurial environment may lead to the

total cancelation of a merger or acquisition or the failing of achieving its aims and goals.

2.4. Financing mergers and acquisitions

One element to distinguish between mergers and acquisitions relates to their

financing in addition to the size of the companies involved. In regards to the latter,

as previously mentioned, the entities involved in a merger are usually of about the

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same size while in an acquisition there are significant differences in the magnitude of

the acquiring company and the target firm.

With respect to the financing of such deals, there are possible ways to go forward. One

obvious possibility is the payment in cash. Cash transactions usually reflect acquisitions

rather than mergers because the shareholders of the acquired entity redeem their shares

and are removed whereas the entity comes under the absolute control and management

of the acquiring company. With respect to the cash option, a range of studies has shown

that mergers and acquisitions are frequently financed via the issuance of debt. (see, e.g.,

Bharadwaj and Shivdasani, 2003; Faccio and Masulis, 2005, Harford et al. (2009); and

Uysal, 2011). Moreover, Karampatsas et al. (2013) find that bidders holding a credit rat-

ing and/or having a higher rating level are more likely to use cash financing in a takeover.

An alternative way to finance such a transaction is via the issuance of stocks on behalf

of the acquiring company and the transfer of them to the shareholders of the target

firm. These stocks are issued at an agreed ratio proportional to the value of the target

company. In these cases, the shareholders of the acquired company are not removed

and still hold a proportional control in the new entity. According to Shleifer and Vishny

(2003), firms make stock-financed acquisitions when their own equity is highly valued,

and in particular when their equity is more highly valued than that of the target company.

In cases of mergers, it is standard practice for the two parties to cancel the shares of

the old companies and issue new shares for the consolidated entity. In these cases,

an evaluation of both companies is performed before the issuance of the new shares.

The evaluation helps the determination of the new entity’s value and also helps the

sharing of new stocks between the two parties.

Overall, there are some general elements that must be taken into account when

choosing the form of payment for a merger or an acquisition. One element concerns

the possible existence of other offers for the target firm. Both the size of the offers

and their payment method may be crucial in order for the target company to decide

on which bid to go for. In this respect, it is highly possible that clear cash offers

supersede other types of offers and tackle the completion of the other bids.

Taxation is another significant factor that affects financing and the overall decision

on a merger or acquisition deal. For this reason, competent accounting and tax

advisors are usually employed to perform relevant due-diligences and establish the

most advantageous proposal.

Going further, the possible effects on the buyer’s capital structure from an acquisition

must not be neglected. In particular, if the financing of the acquisition is to be per-

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formed via the issuance of new shares on behalf of the acquiring company with a rel-

evant capital increase from its shareholders and the transfer of the shares to the target

firm’s stakeholders, the shareholders of the buyer might halter this capital increase

at their general assembly. Such a risk does not exist if the acquisition is to be executed

by a cash payment.

Moreover, the possible effects on the balance sheet and the financial ratios of the

buyer are also important when deciding on the form of payment for an acquisition.

More specifically, when the transaction is to be funded by cash, the liquidity ratios

of the buyer might be harmed. The harm will be even greater if the buyer does not

have enough cash on its own and needs to sign a relevant loan with a financial insti-

tution. On the other hand, in a pure stock-for-stock transaction, the acquiring entity

might report worsened profitability ratios if the profits remain stable while the vol-

umes of assets or capital increase.

Another element to be considered is that there is a close link between the payment

method and the financing options. More specifically, if the acquiring firm will pay

for the transaction in cash, it has two main financing options. The first option is the

usage of cash on hand. In these cases, the acquiring company has sluggish cash that

can be used for the financing of its expanding plans. In case it uses its own cash on

hand, there are no major transaction costs to be borne. The second option relates to

the existence of unused debt capacity. If the company uses this capacity to fund the

deal, it will worsen its debt ratio and increase its borrowing costs. The transactions

costs involved are also greater than those in cash on hand payments.

If the buyer pays for the acquired entity via a stock-for-stock scheme, there are two

financing possibilities. The first is the issuance of new shares, which may improve the

indebtedness ratio of the company and reduce cost of debt. This kind of transactions

includes the fees paid for the preparation of a relevant file for the capital increase

(auditors, publications, etc.) along with the costs incurred for holding an extraordi-

nary assembly of shareholders. The second financing option concerns the shares in

treasury. This means that the acquiring company needs to use the existing shares for

the implementation of the stock-for-stock payment scheme. If the company happens

to hold some of its own shares, it can use them. In any other case, the company needs

to repurchase the necessary shares from the market. These actions may incur positive

effects on the debt ratio and the borrowing costs of the company. On the other hand,

if the company proceeds with the repurchase of stocks from the market, there are

brokerage fees that must be paid.

A last element that needs to be considered in the financing of mergers and

acquisitions is that, in general, the payment method is a way to indicate value. Paying

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cash or with shares is a way to signal value to the other party. More specifically, if the

buyer is willing to offer stock for the payment, the directors of the target company

should suspect that the buyer believes that its stocks are overvalued with respect to

their actual value. On the contrary, if the bidder tends to pay by cash, it will be a

signal that it believes that its stocks are undervalued.

n 3. Historical evolution and recent trends in mergers and adquisitions

3.1. Merger and acquisitions waves

The history of mergers and acquisitions as a means for the development and expansion

of companies well exceeds the one hundred years. Economic history has identified at

least six significant waves of mergers in the business world.1 The first one (The Great

Merger Wave) lasted about ten years from 1895 to 1905. This is characterized by

horizontal mergers via which small entities having weak market share merged with

similar firms in order to create large and powerful schemes so as to boost their position

in the market they operated. The vehicle that was used was the so-called “trusts”.

Companies such as DuPont, US Steel and General Electric underwent mergers and

acquisitions during the Great Merger Movement and became able to maintain their

dominance in their respective sectors till today, due to the technological advances of

their products, patents and brand recognition by their customers.

The second wave spans the period 1916-1929. This wave is characterized by vertical

mergers, namely the mergers of companies operating in different business sectors

with a view to achieving vertical integration and development.

The third wave is located between 1965 and 1969. During this wave, the corporate

marriages involved more diverse companies and resulted in the rise of significant

conglomerate schemes. The buyers frequently entered different business sectors and

industries in order to hedge their production against cyclical bumps or to diversify

their investments portfolio.

The fourth wave of massive mergers and acquisitions took place over the period 1981-

1989. The dominant characteristic of this wave is that the majority of the deals

concerned hostile takeovers and aggressive corporate raiding. Many companies were

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1 Refer to the following link for more details on the history of the six waves of mergers and acquisitions:http://osgoode.yorku.ca/media2.nsf/58912001c091cdc8852569300055bbf9/1e37719232517fd0852571ef00701385/$file/merger%20waves_toronto_lipton.pdf. 1

acquired for their soft capital such as the patents they had developed, the licenses

they had registered, their market share and brand name, their research staffs and

facilities, as well as their customer base and culture.

The fifth wave was observed during the period 1992-2000. The main feature of that

period was that the majority of deals concerned cross-border transactions. During

that period, the buyers sought out entities operating in a similar or homogenous

sector in another country in order to globalize their activity and enhance their capacity

to serve their customers at an international or global level. The goal was to expand

their global footprint and become more agile at creating high-performing businesses

and cultures across national boundaries.

Finally, the sixth and so far the last wave of mergers and acquisitions lasted about six

years during the period 2003-2008. The main characteristics of this wave is that the

transactions that took place were the result of shareholder activism and mainly involved

leveraged buyouts (acquisitions financed by loans) and the increase in activation of

private equity. 2008 is the year that the economic recession burst out in the United

States and started spreading to other continents. Among other effects, the economic

crisis resulted in a major decrease in significant corporate deals worldwide.

With respect to the most significant corporate deals that took place over the last two

decades, Table 1 reports relevant data on the Top 10 of deals. The data presented

includes the ranking number of each transaction, the year the transaction took place,

the names of the buyer and the acquired company, and the transaction value in $mil.

The table is split into two panels. Panel A reports data for the decade from 1990 to

1999 and Panel B provides corresponding data for the period from 2000 to 2010.

l Table 1. Top 10 mergers and acquisitions deals worldwide by value

Panel A: Decade 1990-1999

Rank Year Purchaser Purchased Transaction value (In $mil.)

1 1999 Vodafone Airtouch PLC Mannesmann AG 183,000

2 1999 Pfizer Warner-Lambert 90,000

3 1998 Exxon Mobil 77,200

4 1998 Citicorp Travelers Group 73,000

5 1999 SBC Communications Ameritech Corporation 63,000

6 1999 Vodafone Group AirTouch Communications 60,000

7 1998 Bell Atlantic GTE 53,360

8 1998 BP Amoco 53,000

9 1999 Qwest Communications US WEST 48,000

10 1997 Worldcom MCI Communications 37,000

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Panel B: Decade 2000-2010

Rank Year Purchaser Purchased Transaction value (In $mil.)

1 2000 America Online Time Warner 164,747

2 2000 Glaxo Wellcome Plc. SmithKline Beecham Plc. 75,961

3 2004 Royal Dutch Petroleum Company Shell Transport & Trading Co. 74,559

4 2006 AT&T Inc. BellSouth Corporation 72,671

5 2001 Comcast Corporation AT&T Broadband 72,041

6 2009 Pfizer Inc. Wyeth 68,000

7 2000 Spin-off: Nortel Networks Corporation 59,974

8 2002 Pfizer Inc. Pharmacia Corporation 59,515

9 2004 JPMorgan Chase & Co. Bank One Corporation 58,761

10 2008 InBev Inc. Anheuser-Busch Companies, Inc. 52,000

SOURCE: WWW.WIKIPEDIA.COM

According to the data in Table 1, the most significant deal in terms of cost in the decade

1990-1999 was the acquisition of 35% shares in Mannesmann AG by Vodafone

Airtouch PLC in 2000 in a tax-free stock exchange of 53.7 Vodafone shares for each

share of Mannesmann. This deal raised a lot controversy as never before in Germany

had a large company been acquired by a foreign owner. This was a hostile takeover

which was backed in a private deal between Mannesmann management and Vodafone.2

The cost of this deal reached $183 billion. The name Mannesmann ceased to exist in

the telecommunication sector soon after the deal with Vodafone had taken place.

On the other hand, the “cheapest” deal of the decade was that between Worldcom

and MCI Communications. On November 4, 1997, WorldCom and MCI Communi-

cations announced their $37 billion merger to form MCI WorldCom, making it the

largest merger in US history. The new company, MCI WorldCom, opened for business

on September 15, 1998.3

In the first decade of the 21st century, the most significant deal was that between

American Online (AOL) and Time Warner, which amounted to about $165 billion.

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2 Refer to http://en.wikipedia.org/wiki/Mannesmann. 13 It should be noted that beginning in mid-year 1999 and continuing through May 2002, the company used fraudulent accountingmethods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of itsstock. The fraud was primarily accomplished in two ways. The first relates to the booking of ‘line costs’ (interconnection expenses withother telecommunication companies) as capital on the balance sheet instead of expenses. The second way concerns inflating revenueswith bogus accounting entries from “corporate unallocated revenue accounts”. The fraud was revealed and communicated to thecompany’s audit committee and board of directors by a team of the company’s internal audit department. The people involved werefired, the external auditor (Arthur Andersen) withdrew its audit opinion for 2001, and the U.S. Securities and Exchange Commissionlaunched an investigation on June 26, 2002. By the end of 2003, it was estimated that the company’s total assets had been inflatedby around $11 billion. On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest such filing in UnitedStates history at the time. The company emerged from Chapter 11 bankruptcy in 2004 with about $5.7 billion in debt and $6billion in cash. About half of the cash was earmarked to pay various claims and settlements. Previous bondholders ended up beingpaid 35.7 cents on the dollar, in bonds and stock in the new MCI Company. The previous stockholders’ stock was cancelled, makingit totally worthless (refer to http://en.wikipedia.org/wiki/MCI_Inc.#MCI_acquisition). 1

The deal was announced on January 10, 2000 and officially filed on February 11,

2000. It employed a merger structure in which each original company merged into a

newly created entity. The Federal Trade Commission cleared the deal on December

14, 2000 and gave final approval on January 11, 2001 while the completion of the

deal took place later that day. Due to the larger market capitalization of AOL, they

would own 55% of the new company while Time Warner shareholders owned only

45%, so in actual practice AOL had acquired Time Warner, even though AOL had far

fewer assets and lower revenues.4

Finally, the least expensive transaction in the first decade of the new century was the

purchase of Anheuser-Busch Companies, Inc, an American brewing company, by

InBev Inc, a Belgian-Brazilian brewing company. On June 12, 2008, InBev announced

that it had made a US$ 46 billion dollar offer for the company. InBev also stated that

they would attempt to retain management and board members from both

companies. On June 25, 2008, Anheuser-Busch announced that they would reject the

offer. On July 1, 2008, InBev urged Anheuser-Busch’s shareholders to vote in favor of

the buyout as InBev felt the offer of $65 per share should be considered a reasonable

offer in view of the falling stock market. On July 7, 2008, Anheuser-Busch filed a

lawsuit against InBev to stop them from soliciting the support of shareholders, stating

that the company’s offer was illegal. On July 13, 2008, Anheuser-Busch and InBev

finally said they had agreed to a deal, pending shareholder and regulatory approval,

for InBev to purchase the American icon at $70 per share, creating a new company

to be named Anheuser-Busch InBev. Anheuser-Busch would get two seats on the

combined board of directors. The all-cash agreement, almost $52 billion in total

equity, created the world’s largest brewer producing significant brand names such as

Budweiser, Michelob, Beck’s and Stella Artois.5

3.2. International trends in merger and acquisitions waves

It has been historically observed that the waves in the United States are correlated to

high growth rates in the economy after the end of wars or as a result of major tech-

nological innovations. The favoritism to mergers and acquisitions displayed by the

American governments throughout the business history of this country also con-

tributed to the relevant waves of this kind of corporate activity. In addition, the con-

flict of interests between the managing boards and the shareholders of companies

has also contributed to the evolution of mergers and acquisitions as one major vehicle

for the expansion of the entities.

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4 Refer to http://en.wikipedia.org/wiki/Time_Warner for the details reported on this transaction between AOL and Time Warner. 15 The information provided on this deal is found on http://en.wikipedia.org/wiki/Anheuser-Busch. 1

On the other side of the ocean, in Europe, the major factor that induced the activity

of European entities was the creation of the Unified European Market. The

deregulation and the intensity of global competition also contributed to the

increase in mergers and acquisitions in the European continent. The reform of credit

and banking systems in Europe also created opportunities for profitable

consolidations. Furthermore, the collapse of the socialist regimes in Eastern Europe

and the consequent denationalization of neuralgic state companies gave rise to new

business possibilities and new markets. In this respect, many companies mainly

from the banking sector proceeded to the acquisition of local companies in order

to immediately penetrate the local markets. Moreover, the transformation in the

type of the average European company also contributed to the increase in mergers

and acquisitions activity. The transformation refers to the reduction in the

significance of family-owned companies and the emergence of major publicly

owned companies.

Up to 2008 the trend in the field of mergers and acquisitions was positive and a

spectacular growth in the relevant transactions could be observed, especially in the

case of megamergers, that is the merger of two giants in their sector such as the hostile

takeover of Mannesmann AG by Vodafone Airtouch PLC in 1999. It should be noted

that while the megamergers started out as an American phenomenon, it became more

national in the process. The above mentioned deal reached was between a German

and a British company testifies to this fact.

As far as the comparison between the United States and Europe is concerned,

Figure 1 indicates that the total value in mergers and acquisitions in the United

States is by far greater than that in Europe. Furthermore, this figure shows that

mergers and acquisitions flourished after 1994 and reached their peak in 2000 for

the U.S. and 1999 for Europe. Afterwards, a significant slowdown took place

between 2000 and 2004 in both continents while a recovery happened during the

period 2004-2007.

Over the years, mergers and acquisitions have been an efficient vehicle for the

development of companies in the US and to a lesser degree in Europe whereas Australia

has only participated in the fifth wave of 1992-2000 and the sixth wave of 2003-2008.

However, this is not the case in Asian countries. Figure 2 shows that the Asian countries

have not been very active in this field. The companies of Japan, which was the second

biggest economy in the world before losing its place by China in 2010, got involved in

such corporate actions only recently during the sixth wave as a result of the increase in

the volume of commercial transactions with other countries. The restructuring of the

Japanese economy that started in 1999 also contributed to the increase in mergers and

acquisitions in this country.

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n Figure 1. Mergers and acquisitions in U.S and Europe over the period 1980-2007

SOURCE: THOMSON FINANCIALPart (a) of figure concerns the United States and Part (b) concerns Europe.

n Figure 2. Mergers and acquisitions in Australia and Asian countries over the period 1980-2007

SOURCE: THOMSON FINANCIAL

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200.000

150.000

100.000

50.000

20052002199919961993199019871984

$ M

illio

ns

TAIWAN

200.000

150.000

100.000

50.000

20052002199919961993199019871984

$ M

illio

ns

INDIA200.000

150.000

100.000

50.000

20052002199919961993199019871984

$ M

illio

ns

AUSTRALIA

200.000

150.000

100.000

50.000

20052002199919961993199019871984

$ M

illio

ns

JAPAN200.000

150.000

100.000

50.000

20052002199919961993199019871984

$ M

illio

ns

CHINA

200.000

150.000

100.000

50.000

20052002199919961993199019871984

$ M

illio

ns

SOUTH KOREA200.000

150.000

100.000

50.000

20052002199919961993199019871984

$ M

illio

ns

HONG KONG

2.000.000

1.500.000

1.000.000

500.000

2004200220001998199619941992199019881986198419821980 2006(a)

$ M

illio

ns

2.000.000

1.500.000

1.000.000

500.000

2004200220001998199619941992199019881986198419821980 2006(b)

$ M

illio

ns

Furthermore, in terms of mergers and acquisitions in the other major Asian

economies, Figure 2 shows that this kind of corporate activity in China, India, Hong

Kong, Taiwan and South Korea is rather poor. The reasons for this drawback mainly

relate to economic and political rigidities in these countries. However, Figure 2 shows

that something seems to change at the end of the examined period. That is, we start

to see some hesitant steps forward in mergers and acquisitions mainly as a result of

the restructuring of their economies that is in process.

3.3. Mergers and acquisitions in the banking sector

Banks have three courses of actions to choose from in order to respond to the changes

that take place in the banking sector as a result of the changes in the institutional

framework and macroeconomic environment worldwide. The first course concerns

the enhancement of their national basis via the cooperation with other local financial

institutions in order to protect themselves against international competition. The

second choice is cooperation with banks from other countries with mutual

participation in the capital of the cooperating organizations. This policy is aimed at

forming powerful international institutions capable of competing other big players

of the banking sector. The third option is investment in other banks located in other

countries through mergers and acquisitions.

Mergers between banks are expected to generate significant economies of scale in the

supply of financial services and the vending of such products. The restructuring of

their sales networks along with the reorganization of central services can result in

significant cost savings and the optimization of banks’ operating effectiveness. In this

respect, the integration of information technology systems can contribute to a

significant decrease in fixed costs after the transition period needed for the

establishment of a well-functioning unified information system. In addition, the

surplus productive capacity may be efficiently utilized.

Banking firms in the United States have been quite active in the field of mergers and

acquisitions since the 1980s. Mergers and acquisitions can be particularly important

in order for the small- to medium- size banks to increase their power in the local state

market and enhance their chances of becoming strong national banking institutions.

The choice of their names such as for example those of Nations Bank and Bank of

America are indicative of their intentions and aspirations.

Contrary to the activity in the US, the banking sector in Europe has been less active

in the field of mergers and acquisitions. However, this stance has started to be

changing. Countries such as the Netherlands or Italy seem to be more aggressive than

other member states in this regard. In addition, the main feature of the transactions

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in Europe is that the deals are basically between banks from the same country. This

phenomenon is mainly due to the knowledge of the local markets common to two

banks sharing the same roots and the increased probability they stand to achieve

considerable economies of scale, synergies and optimization of their operations. Their

common origin alleviates the negative effects of asymmetric information and

uncertainty.

Contrary to the abovementioned more-or-less theoretical analysis of the expected

benefits from mergers and acquisitions in the banking sector, a study conducted by

the Federal Reserve Bank of Minneapolis has highlighted that the actual benefits in

terms of economies of scale and improvements in operating effectiveness were inferior

to the expected ones in the case of American banks. This failure to gain the expected

benefits is attributed to the fact that the majority of deals took place between sizeable

banks, whose potential for increasing their operating effectiveness due to economies

of scale is lower than that of small banks. On the other hand, the volume of mergers

between small banks is not so significant that it would affect the conclusion about

the overall impact of mergers and acquisitions in the banking sector in US In another

study, Borio and Tsatsaronis (2005) also showed that the actual results from mergers

and acquisitions have fallen short of meeting expectations. Finally, Berger and

Humphrey (1991) demonstrated that the mergers of banks in the United States did

not result in the desired cost savings.

The quotation of the results of the empirical results above indicate that mergers

between financial institutions is not a corporate action that immediately and

definitely provides value for their shareholders, customers and economy in general.

Consequently, such ventures need to be carefully designed and planned taking all the

factors into account along with the possible frictions and other uncertainties that

may be crucial to the final outcome.

n 4. Mergers and acquisitions in the Greek banking sector

4.1. The recent wave of acquisitions in the Greek banking sector

Over the last months, the so-called Greek “systemic” banks displayed intense activity

in the field of mergers and acquisitions which resulted in a radical transformation of

the whole Greek banking sector. More specifically, Piraeus Bank was the most active,

acquiring the ATE Bank, Millennium Bank, Geniki Bank and three Cypriot banks

operating in Greece doubling this way its loans portfolio. Eurobank obtained the

Hellenic PostBank and the Proton Bank increasing its portfolio of loans by 15%. Alpha

Bank increased its loans portfolio by 27% through acquiring the Emporiki Bank from

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Credit Agricole. Finally, Ethniki Bank, the biggest Greek bank, was the least active and

only purchased Probank, adding 5% of new loans to its portfolio.6

The recent movements in the Greek banking sector accentuated Piraeus Bank as the

winner in terms of increased loans and deposits and Ethniki Bank as the bank with

the most robust and less precarious portfolio having the less doubtful receivables and

the highest loans to deposits ratio compared to the other systemic banks. In addition,

Alpha Bank is the bank with the best liquidity structure among the four systemic banks

being simultaneously the least dependent Greek bank on the Central European

Banking System. Finally, Eurobank managed to improve its basic figures considering

liquidity, doubtful debts and loans to deposits ratio. At the consolidated level, the

four Greek major banks control the 91% of total Greek loans market. This percentage

is considerably higher than the respective figures for Portugal (60%), Turkey (53%),

Italy (51%), Germany (42%), Spain (41%) and Poland (41%).

In order to provide an explanation for the recent intense activity in the Greek banking

sector, we should note that while the typical incentives behind such transactions are

similar to those broken down in section 2.2, in the case of the transactions described

above the main driving factor was different. In particular, the “haircut” of Greek

bonds in March 2012 mandated by the PSI program, which was selected as a decisive

solution to the Greek sovereign debt problem, resulted in huge losses for the private

holders of Greek bonds. This was the case for the Greek systemic banks too, which

were obliged to realize significant losses in their balance sheets after the haircut of

the Greek sovereign bonds included in their portfolios. The consequent need for the

re-capitalization of banks aiming at the stability and robustness of the Greek banking

and finance system triggered the recent wave of acquisitions among the Greek banks.

4.2. Case study: the acquisition of Emporiki Bank by Alpha Bank

4.2.1. The details of the deal The Alpha Bank Group provides a wide range of services in Greece, Cyprus and

Eastern Europe mainly covering the traditional banking operations, leasing, factoring,

corporate and investment banking, asset management, real estate and hotel services.

In developing its business the parent company Alpha Bank has pursued both internal

growth strategies by establishing new bank affiliates in several foreign countries (e.g.

Alpha Bank Romania S.A.) and development strategies by acquiring other bank

organizations such as the Ioniki Bank, which was acquired in March 1999 and fully

absorbed by Alpha Bank in April 2000.

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6 Information on the activity of the Greek banking sector and loans and other market shares was found in a report by Kathimerini on5/9/2013.

The most recent endeavor of Alpha Bank in the field of mergers and acquisitions

relates to the purchase of Emporiki Bank, which was announced on 16 October 2012.

The legal merger of Emporiki Bank with Alpha Bank was completed on 28 June 2013

via the absorption of Emporiki Bank by Alpha Bank. The new organization has a

broad network of over 1,200 service points in Greece and a robust capital structure

exceeding the €6.7 billion (according to the interim financial statements as at 30

September 2013 found on the website of Alpha Bank).

According to the press announcement made by Alpha Bank on 1 February 2013 in

regards to the completion of the transfer of Emporiki’s shares to Alpha Bank, the

transaction contributed 2.7 billion Euros of net assets (equity) to Alpha Bank as well

as a loans portfolio of high value covered by 22% with relevant provisions of 4.9 billion

Euros. Moreover, the new organization will have a 20% market in deposits and a 24%

market share when it comes to loans mainly focusing on housing and corporate credit

and mainly on the industrial and constructive sectors. Going further, substantial

annual synergies of 200 million Euros are expected to accrue for a period of three

years after the completion of the merger between the two banks.

As far as the expected synergies of 200 million Euros are concerned, 150 million Euros

regard synergies from cost restructuring with respect to the network, the avoidance

of duplicate operations and the economizing on third parties’ fees and remunerations.

The rest 50 million Euros will derive from adjustments to the pricing policies of

Emporiki Bank in the field of time deposits, the boost in sales of higher profit margins

due to the increased market and customers’ confidence in the new organization, and

the realization of cross-selling activities.

4.2.2. The implications for Alpha Bank’s share price4.2.2.1. Literature and methodological issues

In addition to the business features of Emporiki Bank’s acquisition by Alpha Bank

described above, some empirical work is performed on the implications of this deal

for the share price of Alpha Bank. In this respect, the literature has shown that a

variety of factors can affect the share value of the bidding and the target companies

at the announcement of corporate takeovers.

First, the studies of Goergen and Renneboog (2004), Gregory (1997), Franks and

Mayer (1996) and Servaes (1991) have shown that the announcement of hostile

takeovers results in higher and lower returns for the target and the bidding companies

respectively than the announcement of friendly takeovers.

Another pattern revealed relates to whether the management of the bidding company

owns large portions of the bidding company’s shares and the impact of this fact on

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the share price of the company. According to the studies of Healy et al. (1997) and

Agrawal and Mandelker (1987), when managers do not own equity, the agency costs

in the company increase. This increase in agency costs is discounted in the share prices

of the bidding companies because the shareholders will probably believe that the

managers of their company they do not work in the interest of the owners but rather

implement self-rewarding growth strategies.

Moreover, the literature has shown that the announcement of cash transactions entails

higher returns for the bidder and the target than is the case with equity transactions.

Several studies such as those of Franks et al. (1991), Andrade et al. (2001), and Moeller

et al. (2004) have demonstrated that the announcement of an equity bid may create

the impression that the bidding managers believe that their firm’s shares are overpriced,

such that investors adjust the bidders’ share prices downwards.

Another element highlighted in the literature is that the acquisition of value-

companies results in returns both for the bidding and the target company. Rau and

Vermaelen (1998) demonstrate that the acquisition of companies with low market-

to-book ratios generates high abnormal returns for the bidding firm’s shareholders.

On the contrary, the takeover of firms with high market-to-book ratios results in

significant negative abnormal returns for the shareholders of the acquiring company.

A final element concerns the different return implications for the companies involved

according to whether the transactions are domestic or cross-border. In this respect,

several studies such as those of Wansley et al. (1983), Dewenter (1995) and Danbolt

(2004) have shown that the target companies in cross-border deals tend to gain larger

abnormal returns than their counterparts in domestic bids. A further consequence

revealed by Conn et al. (2005) is that the share price of companies acquiring foreign

firms significantly underperforms that of bidders participating in domestic takeovers.

The price reaction of Alpha Bank’s share to the announcement of Emporiki Bank’s

takeover is investigated following the approach found in Martynova and Renneboog

(2006). More specifically, the price reaction to the announcement made on 16

October 2012 is calculated by computing the abnormal returns of Alpha Bank’s share

around the announcement date. Abnormal return is defined as the difference between

the realized return and the expected return of the share. This definition of abnormal

return is shown in the following equation:

ARt = RRt – E(Rt) , (1)

where ARt denotes the abnormal return on day t, RRt is the realized return on the

same day and E(Rt) is the expected return on the same day. The expected return [or

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benchmark return in Martynova and Renneboog (2006) terms] is calculated using

equation (2).

E(Rt) = a + bRm,t , (2)

where Rm,t is the actual market return on day t. In order to obtain the alpha and beta

coefficients used in equation (2) for the computation of expected return of Alpha

Bank share, we apply two alternative models. The first one is the market model

expressed in equation following (3):

RAB,t – Rf = aAB + bAB (Rm,t – Rf)+eAB,t , (3)

where RAB,t is the actual return of Alpha Bank share on day t, Rm,t is defined as in above,

Rf is the risk-free rate expressed by the 12-month Euribor, and eAB is the residual of

the regression (i.e. return portion which is not explained by the model).

The second model used for the calculation of alpha and beta coefficients to be used

for the calculation of Alpha Bank’s expected return is the model of Dimson (1979).

This model is depicted in equation (4).

RAB,t = aAB + b (–1)AB (Rm,t – Rf)(–1) + b (0)

AB (Rm,t – Rf)(0) +b (+1)AB (Rm,t – Rf)(+1) +eAB,t . (4)

where (–1) indicates 1 time lag and (+1) one time lead.

The usage of the model of Dimson (1979) aims at controlling for non-synchronous

trading which may cause a downward bias on the estimation of beta. Based on

Dimson model, the beta coefficient that will be used in equation (2) is the sum of

the three beta coefficients of model (4).

Following Martynova and Renneboog (2006), the parameters of the above models

(3) and (4) are estimated over a period of 240 trading days starting from 300 days

before the announcement of 16 October 2012 and ending 60 days before the

announcement. The parameters during the event window spanning 60 days before

and 60 days after the announcement (120 trading days in total) are then estimated.

In addition, to Martynova and Renneboog (2006), The models are run separately for

each one of the two sub-intervals of the event window (60 days before and 60 days

after the announcement). This is in order to assess whether there is a different share

price reaction just before and immediately after the announcement of takeover.

It should be noted that the models above are estimated using three alternative indexes

of Athens Exchange standing as proxies for the market return, namely the Banking

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Sector Index, the General Index of Athens Exchange and the Large Cap Index, which

includes the 20 largest entities of the Greek stock exchange in terms of capitalization

(Alpha Bank is one of those 20 firms).

4.2.2.2. Empirical evidence

Before analyzing the abnormal returns obtained by estimating the models (1) to

(4), Table 2 provides some information on the descriptive and trading statistics

over the four periods concerned. In particular, Table 2 provides information on the

average daily return and the risk of Alpha Bank share, the intraday volatility

calculated in percentage terms as the fraction of highest minus lowest price on day

t to the closing price on the same day. Similar information is provided for the three

market indexes used too. Finally, the table includes the average terms of daily

volume (in number of traded shares), the average daily turnover (in euros), and the

number of the average daily transactions on Alpha Bank share.

Over the first estimation period (i.e. 300 days before the announcement of takeover

to 60 days before the announcement), Table 2 shows that the Alpha Bank share

was achieving an average daily return of –0.019%. This was better than the

corresponding market returns. On the other hand, the share of Alpha Bank was

significantly riskier than the market proxies as inferred by the estimates of both the

risk and intraday volatility. Finally, the trading activity of Alpha Bank share over the

first estimation period was substantial (from the perspective of the Greek stock

exchange) with an average of about 4.5 shares traded each day via the execution of

2,311 transactions amounting to approximately €5.4 million.

During the event window (i.e. 60 days before and 60 days after the announcement),

the average daily return of Alpha Bank share is equal to 0.380% being in line with

the return of the General Index of Athens Exchange but superior to the returns of

the Banking Sector Index and the Large Cap Index. The increase in average return

of Alpha Bank could be related to the announcement of Emporiki Bank’s takeover

or could be the just a result of the upward path of Athens Exchange evidenced

by the increase in the value of General Index. However, the superiority of Alpha

Bank over the two other market indexes examined gives some support to the idea

that the announcement may have positively affected the pricing of Alpha Bank’s

share and is indicative of a positive price reaction from the market to the

announcement.

Furthermore, during the event period Alpha Bank remains riskier than the market

benchmarks. On the other hand, Table 2 reports a relative drop in trading activity

as assessed by the decreased number of shares traded on average over the event

window and the average number of transactions. The average turnover however is

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slightly higher than that prior to the event period obviously as a result of the

increased value of Alpha Bank share.

When it comes to the 60-day period before the announcement, the daily return of

Alpha Bank was remarkable compared to those of the indexes. More specifically, the

average return is equal to 1.100% being significantly higher than the respective return

of Banking Sector Index, General Index and Large Cap Index. This pattern could be

indicative of the fact that the market has discounted the possible implications for

Alpha Bank deriving from the possible takeover of Emporiki Bank. Furthermore,

Alpha Bank share remains riskier than the indexes. On the question of trading activity,

Alpha Bank share seems to be less tradable over the 60-day period before the

announcement. This is evidenced by the decreased volume, turnover and number of

transactions compared to the previous periods assessed.

Finally, during the 60-day period after the announcement of takeover, the average

daily return of Alpha Bank is negative being lower than the returns of the General and

Large Cap Index but better than that of the Banking Sector Index. This is in line with

a similar negative pattern in post-announcement returns found by Martynova and

Renneboog (2006) in the case of European mergers and acqusitions over the period

1993-2001. The main inference that can be drawn by comparing the return of Alpha

Bank share to the returns of benchmarks is that Alpha Bank was in a better position

than the other Greek banks included in the Banking Index possibly as a result of the

announcement of takeover. On the other hand, banking sector as a whole was in

trouble over the 60-day period after the announcement (ending on 14 January 2013)

possibly due to the standing financial and fiscal problems faced by the Greek

economy. The rise in the value of General and the Large Cap Indexes during that

period must have been supported by the non-financial entities comprising the index.

When it comes to tradability immediately after the announcement, Table 2 shows an

increase in such an activity expressed in all the alternative measurements of trading

activity. Given the decrease in share price of Alpha Bank, the increased tradability

may be mainly accounted for by redemption of shares rather than new purchases.

However, we have no relevant data available that allows us to reach a firm conclusion

in this respect.

Overall, given that the takeover of Emporiki Bank by Alpha Bank was a friendly one,

my analysis lies within the framework of the studies of Goergen and Renneboog

(2004), Gregory (1997), Franks and Mayer (1996) and Servaes (1991) which have

shown that the announcement of friendly takeovers results in higher returns for the

bidding firms. The analysis of unadjusted raw returns of Alpha Bank share can be

considered to provide some support to the findings of the above studies.

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l Table 2. Trading statistics

Table 3 provides the calculations of abnormal returns of Alpha Bank share compared

to the three market indexes over the four investment windows concerned. The table

presents the computations of abnormal returns and the t-statistics on the statistical

significance of the figures along with the alpha and beta coefficients obtained by the

estimation of the market and Dimson (1979) models.

The main element deriving from the calculations is that no abnormal returns are

achieved by the Alpha Bank share as a result of to the announcement of Emporiki

Bank’s acquisition. All the individual abnormal return figures calculated are essentially

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Panel A: Estimation Period 1

Return (%) Risk (%)Intraday

volatility (%) Volume

(in shares)Turnover(in Euros)

No of transactions

Alpha Bank -0.019 8.749 10.135 4,466,483 5,371,094.70 2,311

Banking Index -0.348 6.254 7.657 - - -

General Index -0.188 2.800 3.504 - - -

Large Cap Index -0.242 3.473 4.395 - - -

Panel B: Estimation Period 2

Return (%) Risk (%) Intraday volatility (%)

Volume (in shares)

Turnover(in Euros)

No of transactions

Alpha Bank 0.380 6.231 7.513 3,434,480 5,704,457.47 1,913

Banking Index 0.188 5.439 6.756 - - -

General Index 0.378 2.147 2.851 - - -

Large Cap Index 0.339 2.721 3.538 - - -

Panel C: Estimation Period 3

Return (%) Risk (%) Intraday volatility (%)

Volume (in shares)

Turnover(in Euros)

No of transactions

Alpha Bank 1.100 4.986 5.998 2,884,674 4,501,529.35 1,534

Banking Index 0.918 4.440 5.582 - - -

General Index 0.492 2.200 2.747 - - -

Large Cap Index 0.527 2.663 3.268 - - -

Panel D: Estimation Period 4

Return (%) Risk (%) Intraday volatility (%)

Volume (in shares)

Turnover(in Euros)

No of transactions

Alpha Bank -0.405 7.258 9.062 3,971,928 6,863,253.27 2,286

Banking Index -0.576 6.264 7.973 - - -

General Index 0.240 2.113 2.956 - - -

Large Cap Index 0.125 2.801 3.816 - - -

Estimation Period 1: 300 days before the announcement of Emporiki Bank’s Takeover on 16 October 2012 to 60 days before the announcement. Estimation Period 2: 60 days before and 60 days after the announcement of takeover.Estimation Period 3: 60 days before the announcement of takeover.Estimation Period 4: 60 days after the announcement of takeover.

nil since they lack any statistical significance. The results are relatively in line with the

findings of Martynova and Renneboog (2006), who report modest abnormal returns

for the bidding companies amounting to just 0.5%.

l Table 3. Abnormal returns of Alpha Bank share

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Panel A: Estimation Period 1

Market model Dimson model

alpha beta Abnormal return alpha beta Abnormal return

Banking Index 0.463b 1.296a -0.032 0.520b 1.423 -0.044

(t-test) (2.164) (37.896) (-0.148) (2.403) - (-0.203)

General Index 0.562 2.418a -0.128 0.602 2.642 -0.126

(t-test) (1.323) (19.391) (-0.360) (1.372) - (-0.352)

Large Cap Index 0.615b 2.126a -0.120 0.652c 2.351 -0.103

(t-test) (2.016) (24.255) (-0.397) (1.816) - (-0.335)

Panel B: Estimation Period 2

Market model Dimson model

alpha beta Abnormal return alpha beta Abnormal return

Banking Index 0.183 1.062a -0.003 0.237 0.958 -0.037

(t-test) (0.874) (19.777) (-0.013) (1.172) - (-0.171)

General Index -0.432 2.301a -0.057 -0.363 2.122 -0.058

(t-test) (-1.231) (14.194) (-0.164) (-1.014) - (-0.168)

Large Cap Index -0.241 1.956a -0.042 -0.185 1.823 -0.053

(t-test) (-0.811) (17.941) (-0.142) (-0.625) - (-0.178)

Panel C: Estimation Period 3

Market model Dimson model

alpha beta Abnormal return alpha beta Abnormal return

Banking Index 0.200 0.980a 0.000 0.403 0.729 0.028

(t-test) (0.678) 10.383 (0.001) (1.466) - (0.081)

General Index 0.248 1.816a -0.042 0.286 1.426 0.112

(t-test) (0.626) 10.208 (-0.108) (0.672) - (0.281)

Large Cap Index 0.294 1.588a -0.030 0.316 1.300 0.100

(t-test) (0.842) 12.203 (-0.088) (0.858) - (0.281)

Panel D: Estimation Period 4

Market model Dimson model

alpha beta Abnormal return alpha beta Abnormal return

Banking Index 0.235 1.104a -0.004 0.329 1.078 -0.113

(t-test) (0.763) (16.880) (-0.013) (1.040) - (-0.394)

General Index -1.010c 2.798a -0.066 -0.790 2.412 -0.193

(t-test) (-1.834) (10.699) (-0.121) (-1.395) - (-0.349)

Large Cap Index -0.642 2.268a -0.047 -0.456 2.062 -0.207

(t-test) (-1.405) (13.782) (-0.103) (-0.991) - (-0.450)

Abnormal return = Realized return - Benchmark returnBenchmark return=a + b*(Market return) Estimation Period 1: 300 days before the announcement of Emporiki Bank’s Takeover on 16 October 2012 to 60 days before the announcement. Estimation Period 2: 60 days before and 60 days after the announcement of takeover.Estimation Period 3: 60 days before the announcement of takeover.Estimation Period 4: 60 days after the announcement of takeover. a statistically signifi cant at the 1% level; b statistically signifi cant at the 5% level; c statistically signifi cant at the 10% level.

n 5. Conclusion

Competition among business corporations for the dominance of the market and

profit maximization leads companies to involve in mergers with other entities or

the acquisition of other firms. The issue of mergers and acquisitions is the subject

of the current paper. The focus of the study is on the description of the several types

of mergers between firms, the main incentives behind this kind of corporate action,

and the analysis of the various counterincentives and obstacles that hinder such

deals and quite often result in the failure of these endeavors. Significant attention

is also paid to the financing options for mergers and acquisitions. A brief historical

analysis of the major mergers and acquisitions waves along with the examination

of recent trends in the corporate and banking sectors are provided. Afterwards, the

recent wave of acquisitions among the Greek banks is discussed focusing on the

takeover of Emporiki Bank by Alpha Bank and the share price reaction to the

announcement of the takeover.

With respect to types, it should be noted that there are a lot of merger and acquisition

schemes. Probably, the most significant element regarding the types is that mergers

and acquisitions are not always friendly, namely the both parties of a deal do not

always voluntarily consent to the transaction taking place.

On the question of incentives and motivations behind these corporate deals, the main

inference is that companies adopting such policies believe that purchasing or merging

with other companies can contribute to the improvement of their financial

performance and the enhancement of their strength whereas it can also help mitigate

competition from other players, possibly resulting in the control of the overall market

and an increase in revenues and profits.

When it comes to the counterincentives that frequently result in the failure of such

deals, they first relate to fears of the target entity’s staff that they might be deprived

of their benefits or even lose their jobs. Another source of failure stems from the

cultural differences between the two firms. The low frequency and/or low quality of

the communication of the expected benefits to the target company’s staff can also

contribute to a merger or acquisition deal being unsuccessful. The lack of a suitable

strategic plan based on rational and prudent expectations about the synergies,

economies of scale and the profits to be made provides an inaccurate view of the

possibilities of the initiative and may lead to the failure of the entire venture. Finally,

issues regarding the techniques applied for the evaluation of the target firm, which

might lead to unduly high prices being paid, along with possible unfavorable

economic conditions and legal and institutional framework might lead to a merger

or acquisition failing to achieve its aims and goals.

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Finally, as far as the financing of mergers and acquisitions is concerned, there are

several possible approaches, the two most significant of which are payment in cash

or for the acquiring company to issue stocks and transfer them to the shareholders

of the target entity. Overall, there are some general factors that must be considered

when deciding on the payment method. These factors relate to the possible existence

of other offers for the target firm, the size of the offers and their payment method,

which may be crucial in order for the target company to decide on which bid to go

for, taxation, and the possible effects on the buyer’s capital structure. A last element

needing to be taken into account in the financing of an acquisition is that the payment

method can signal value to the other party. In particular, the buyer’s willingness to

offer stock for the payment may result in the directors of the target entity assuming

that the buyer believes that its stocks are overvalued. On the contrary, if cash is

offered, it may seem that the bidder believes that its stocks are undervalued.

With respect to the trends in mergers and acquisitions, historically speaking, the

relevant waves in the United States relate to high growth rates in the economy after

the end of wars or as a result of major technological innovations as well as the

favoritism displayed by the American governments on an enduring and consistent

basis. On the other hand, in Europe, mergers and acquisitions have been positively

affected by the creation of the Unified European Market, deregulation and global

competition. The reform of credit and banking systems in Europe also created

opportunities for profitable consolidations as did the collapse of the socialist regimes

in Eastern Europe and the consequent denationalization of state firms and business

sectors. In Asia, mergers and acquisitions activity has been less strong and the

majority of Asian countries have not been very active in this field.

Finally, the paper highlights the fact that the Greek banking sector recently displayed

intense activity in the field of acquisitions. This was mainly triggered by the re-

capitalization needs of Greek banks resulting from the huge losses written onto their

balance sheets due to the haircut of the Greek sovereign bonds. As shown, Piraeus

Bank was the most active and possibly the most benefited bank out of the four

systemic Greek banks significantly increasing its market share and strengthening its

presence in the Greek banking system.

With respect to the case study examined in this paper- the acquisition of Emporiki Bank

by Alpha Bank-, the analysis has revealed that material benefits are expected to

materialize from this transaction over a three-year interval in terms of synergies, cost

savings and increased business and turnover. When it comes to the impact on the share

price of Alpha Bank exerted by the announcement of takeover on 16 October 2012,

the analysis provided some evidence of a positive impact on the value (raw returns) of

Alpha Bank share around a relevant event period of 60 days before and after the

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expected returns calculated using suitable models were not gained over that period.

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